What should I do My Adjustable Rate Mortgage will be adjusting?

Question:  My Home Mortgage Rate is about to adjust.  What does that mean and what should I do?

Answer:  The full impact of a Home Mortgage, that has an adjustable rate tied to it, really depends on the type of Home Mortgage you have.  The most popular adjustable rate programs used over the last six years were the subprime loans.  These Home Mortgage Programs were designed to place high risk borrowers into homes typically at a rate just low enough to qualify.  The adjustable rate period for these loans ranged from two to three years.  They are known in the mortgage business as two/twenty-sevens or three/thirty-eights.  They were designed to adjust every six months until the rate hit the market cap rate, which is around 11%.  This can be quite disconcerting for anyone currently committed to these Home Mortgage Programs.  These loans are designed for the purpose of requiring you to refinance after the two or three year grace periods.  If you do not refinance your Home Mortgage you can expect your rate to surge 2% every six months, until it hits that Market Cap rate.  If you had a 5% rate on this loan it would jump up to 7%, 9%, and 11% (respectively) over time. 

The second type of Adjustable Rate Mortgages offered in the market has far less risk attached to it and, as a result, the adjustment periods are more conducive.  FHA and Conventional A-Paper Home Mortgage programs have an Adjustable Rate Mortgage Option.  These Rates typically adjust only once per year and will not exceed 1% per year during that time.  This option will give most Home Mortgage clients the ability to refinance when it is sensible for them.  For example, we have several clients that entered into an ARM Home Mortgage program at 3.875%.  This is a great rate and they have it locked for five years.  In Year Six that Home Mortgage will be set to adjust.  The adjustment can only go up 1%, therefore making the highest rate available for that year set at 4.875%.  That rate is still better than the 30 year rate currently being offered.  In Year Seven the rate could advance to 5.875%, assuming the worst case scenario. Once again, that rate is right in line with what is being offered on 30 year fixed rates. 

Much of the publicity enveloping around adjustable rate mortgages is fed from media outlets.  These media outlets will only report the most negative aspects of the business.  A tornado hits a small town—what do you see on the news?—three trailers hanging from a tree.  You may know just what I am talking about.  The point I am trying to make is that you need to understand what type of Home Mortgage you are getting yourself into.  There are benefits from an Adjustable Rate Mortgage when it is done right.  The clients that have been in their house for five years at 3.875% will attest to the benefits that they had.  There are so many right reasons to do an Adjustable Rate Mortgage, however the most obvious wrong reason is for qualification purposes.  Many of the subprime lenders, now out of business, qualified these Home Mortgage programs with the lower teaser rates in order to guarantee approval for people.  What they neglected to do was analyze the impacts created by the adjustment for these buyers.  These borrowers were put in a position where they could no longer afford their payments at the higher interest rate levels.  This has caused many Americans to succumb to a Foreclosure status.

So, now that we have talked about what the Adjustable Rate Mortgage is, we will focus on what you should do.

Option 1:  Refinance Your Home

Utilizing a premier Home Mortgage broker, you can gain access to all programs that are available to you, and not just the programs offered by that bank.  The most popular refinance for those borrowers who took out a subprime loan was an FHA Home Mortgage.  The FHA option allows for a little more risk than the conventional A-Paper loan option.  The Higher risk also allows for a higher loan-to-value ratio.  This is impressive, as most Home Mortgage programs face home value issues.  You do not need much appreciation on your home to qualify.  In fact, you only need 3% if you have not refinanced before, and 5% if you have refinanced.  If the rate creates payment obstacles for you then the new five year adjustable rate mortgage might be the solution for you.  FHA Home Mortgage ARM products are far less volatile than subprime ARM products.  I recommend the five year option as a qualifying option because it will allow you an additional five years to move your current situation back on track.  This is the most feasible option available for people who are not happy with the adjustment that is about to take place on their Home Mortgage program.

Option 2:  Let your Rate adjust and continue paying.

Earlier, I stated that some adjustments are not detrimental.   Home Mortgage programs that only adjust once a year (at a rate of 1% a year) may still offer a lower rate than what the market currently offers.  In these circumstances it is best to wait and refinance only when the market hits a low point.   Home Mortgage programs should be designed to meet both your current and future needs.  Refinancing should only take place when it makes sense for your long term objectives.  Many people looking to refinance their current Home Mortgage Program do so because it saves them $200 a month today; then they sell their home the following year.  The cost of the refinance will set you back much more than the savings you earn over the next year.  Your net proceeds from the sale of that house will be far lower than the savings you received from the refinance.  So, refinancing your Home Mortgage should only take place when it makes sense to do so.  Talking to your Home Mortgage broker and asking for amortization schedules will help you make that decision.

Option 3:  Sell your Home

While not the most popular option, if you find yourself in a situation where you can no longer afford your payments, selling your home will be the best option.  Hopefully, you have some equity to make the sale of the home complete.  However, if you are upside down on your home (like many of us are) you can also go into a short sale situation.  You should contact a professional Real Estate agent to answer your short sale questions.   Home Mortgage loans have been adjusting for many people in a way that makes it impossible for them to continue making payments.  Circumstances arise that may have contributed to these obstacles, but putting your home up for sale and eliminating the threat of continued  Home Mortgage rate hikes may help you save money over the long term.